Friday, December 28, 2012

Patenting Human Genes

A friend of mine sent me THIS article about human gene patenting, which basically makes the assumption that the practice is absurd and should be stopped. But it's not that simple.

If a company manages to identify a specific gene - the gene for breast cancer, for instance - our legal system currently recognizes that as a patentable discovery. Is this sensible? The question is whether identifying genes is novel enough to merit a patent, which depends on how difficult it is to identify a specific gene. Presumably you can't just point to a gene and say "I patent that one!" You have to figure out the function of that gene. If it turns out that that is a relatively simple process, then gene patents should probably be thrown out as trivial. But if it's not so easy - if it takes hard, dedicated work by experts to figure out which genes do what - then a patent makes more sense. The reasoning behind patents is that the people who do the research and the inventing are not typically the same people who are best at making products and taking them to market.  Patents induce researchers and inventors to develop intellectual property in order to sell it to the companies that can turn that intellectual property into useful products.

If intellectual property rights did not spur innovation, then we could get rid of them. It's really not about the moral imperative to reward people for their work, but about the social imperative to induce people to work by offering rewards. IP is not typically regarded as a fundamental right. Rather, it is a legislatively invented right, a state-issued monopoly authorized by the Constitution for the explicit purpose of encouraging innovation. We are allowed to tweak the rules if we can make the patent system more efficient.

If it turns out that you get more bang for your buck from a 10-year patent term for genes than you do for the current 20-year term, then we could make that change. If it turns out that we actually get more innovation by exempting genes from the patent system entirely, then we should do that. But we should not just eliminate patents for genes entirely out of a knee-jerk reaction if that means less innovation. We want researchers to research and we want companies to turn their research into useful products, and the traditional way to get that is through patents.

We can also recognize a distinction between using someone else's patent for research and using someone else's patent to sell a product. The law already makes such a distinction regarding pharmaceutical patents, and it may already be the case for gene patents, too. The idea is that you can use someone else's patent for free when you are just doing research. If your research pans out, only then do you have to license or buy the other patents in order to sell your product.

Now, patents are short-term monopolies, and the obvious problem with monopolies is that the monopolist will try to extract monopoly prices. How do you handle that? If someone has a patent on the one thing that will save your life, how do you stop them from squeezing every last penny out of you? Congress can require patent-holders to use RAND pricing - Reasonable And Non-Discriminatory. It has to be enough to allow a decent profit margin that accounts for the high costs associated with research and development, but not so much that it is considered unreasonable either by the statute or by a judge. That's how you get around the price gouging problem.

As I said, patents are a legal invention, not a fundamental right. We use them because they work. If we can fine-tune our patent system to make it better, great. But the current debate about patents seems to focus overwhelmingly on the costs while ignoring the correlative benefits, and you just can't get the calculation right that way.

Here's the point: In order to address an ailment associated with a specific gene, it may help to know which gene. It's not so crazy to pay the guy who figured out which is the relevant gene, because then he might spend his time identifying the functions of other genes.

Thursday, December 27, 2012

The Importance of Being a Fan

Whether Lebron James has fans might affect the sales of his jersey, but it doesn't affect his stats. It doesn't affect the scoreboard. It doesn't affect his rank. In some sense, it doesn't matter if Lebron James has fans because he is still, objectively, a great basketball player.

But it does matter whether William Blake has fans. He might have been just some cooky, idiosyncratic guy whose poems and art would have faded from history if each generation did not find some passionate admirers to champion his work - guys like Wordsworth, Northrop Frye, Alan Ginsberg, and Harold Bloom. And those guys, too, are only relevant because they have fans. In the contest of ideas, you either have fans or you don't exist.

That's why I make no bones about being a Richard Epstein fan. I think he is the Aristotle of our age, the Lebron James of thinkers. He puts up intellectual three-pointers like it ain't no thing, yet in the debates of our day he is a virtually unknown player. Epstein is doing his job. He needs more fans out there lobbying for him. So, this is me lobbying for The Smartest Person Alive. Do yourself a favor and acquaint yourself with Richard Epstein by subscribing to this podcast:

Thursday, December 20, 2012

Multiverse Board Game

Damn it, as if I didn't have enough projects to work on, I just had a really great idea that I will have to pursue or it will haunt me.

In 2013, I'm going to make a Kickstarter project for an ironic party game for geeks called Not Happenin'! Participants will compete to see who can come up with the most creative/interesting thing that isn't happening anywhere in the Multiverse - basically, formal contraditictions like "The bachelor in the circular room is speaking with his wife in the corner."

Or... maybe... one person has to come up with a sentence, and then the others have to turn it into a logical impossibility. Participants score points for every contradiction they can embed in the sentence.

And to take it even further, the point system should accommodate different types of impossibilities. I'm reading about them here:

Let's say each logical impossibility gets, for fun, pi points. (So you've gotta have a calculator with pi in order to play.) A metaphysical contradiction can get 2 points, nomological can get 1, and temporal can get half a point. This could actually be fun!

Ok, I'm publishing this idea here so nobody can steal it.

UPDATE: Ok, as I think about this, there need to be parameters on how people can expand the sentence. Maybe it just needs to be a grammatically correct sentence, but limited to three or four clauses. Or maybe there are constraints on how many nouns can be added. "In the corner of a cicular room" would work for just about every sentence, so you need to avoid things like that. Maybe you have to stick to the nouns and verbs given. I dunno, I've gotta think about this and experiment to see if it would actually work as a game. I like the premise, though.

UPDATE #2: Example: "The dog is barking at the mail man." You could turn that into: "The scaly dog is barking silently at the ovulating mail man." Dogs, by definition, are mammals, which categorically do not have scales; therefore a creature with scales is not a dog. I think that counts as a metaphysical contradiction, right? (Maybe I should do away with the logical / metaphysical distinction since the difference is so unclear...) Then you can't bark silently because barking is, by definition, producing a sound. And the ovulating postal worker, by definition, a is not a mail man. I think those would count for 2 points each, so I'd get 6 points for that.

I just had another idea. You can't use pronouns as either the subject or the object.

So here's another example: "The bartender called the repairman because the air conditioning unit stopped working." (As I'm thinking of these examples, I'm just trying to pull sentences out of thin air rather than thinking through how they might be used.) Ok, so using that example we could come up with: "The absent bartender on the moon never called the destructive repairman because the constantly inert two-piece air conditioning unit stopped working."

I used a bunch of new tricks with this one. First of all, we can construe the word "bartender" to be contingent on tending the bar, which he can't do if he's absent. (Of course a bartender is still a bartender even when they're not tending bar, but making these sorts of linguistic arguments will be the name of the game.) Second, on the moon there is no air for an air conditioner, so is it a nomological impossibility? Someone could argue that if a person is on the moon then that means they are in some kind of moon base with air; maybe the person who came up with the sentence has to be the judge? Or by vote? Or maybe if you can get one other person to endorse your crazy explanation, then it goes to a coin toss to settle the dispute? Anyway, third you could argue that a repairman is by definition not destructive. Fourth and fifth, the word "constantly" can be used to negate "stopped," just as "inert" can negate "working." Finally, "two-piece" contradicts "unit."

Oh, there's one more. By saying he never called the repairman because it stopped working, the sentence becomes illogical. Why would you never call the repairman because it stopped working? Introducing that kind of contradiction should get points too even though it doesn't actually make it impossible.

Oh, duh! If multiple people come up with the same thing, they cancel each other out, like in Scattergories. And maybe should limit adjectives to 1 per noun? Or maybe not; as long as they can cancel out, it benefits to add as many as possible. But if they don't cancel out, then the strategy is to try to differentiate from your opponents. Hmmm...

I think I've got the basis for a fun game here!

The Multiverse and Infinite Probability

Something I just read reminded me of probably the most mind-blowing idea ever. Prepare to trip out:

Because the balance of the forces and quantities in the universe is so precisely tuned that even small variations would make the formation of complex matter impossible, it follows that we probably live in a multiverse full of universes. (Just like we're on a Goldilocks planet, we're in a Goldilocks universe.) That's not science fiction; it is, I believe, more or less the consensus view.

So how many universes are there? Any finite number seems to imply a kind of arbitrary limiting condition, so the simplest (and therefore most likely) answer might well be that there are infinite universes. IF THAT'S THE CASE, then there must be other Kevin Freis out there typing this very sentence, and other versions of you reading it. The mind-blowing part is that this isn't like in the tv show Sliders, where every quantum outcome generates a parallel reality (which is a freaky possibility too). Rather, there are other Kevin Freis in other universes typing this sentence as a pure COINCIDENCE!!! And not just one Kevin Frei, but an infinite number of Kevin Freis. And not just typing this sentence, but doing every conceivable activity. Again, not because these are parallel universes of the regular sci-fi type, but because no matter how improbable a coincidence - like, a planet evolving in exactly the same manner down to the quantum level - in an infinite number of universes it must occur an infinite number of times. I hope your mind is blown for the day!

Friday, December 14, 2012

My Take on the Second Amendment

Like a lot of people, I've been thinking about the Second Amendment today. I think I came to something resembling a conclusion, which I would like to work out here. Bear in mind that I'm an amateur at this with no real training, so these are just my opinions.

To begin with, let's leave aside the question of whether gun ownership is a natural right and focus on the salient question, which is how it operates as a legal right.

The Second Amendment reads:

"A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed."

The Second Amendment is part of the Bill of Rights, which was added to the Constitution to get the necessary states to sign it. The argument against including a Bill of Rights was that it implies that any State action not specifically prohibited by it is fair game, when in fact anything not specifically enumerated by the Constitution is meant to be prohibited. That was a big debate, but the prevailing argument was that the Bill of Rights merely clarifies certain liberties without extending new powers to the State. A little redundancy doesn't hurt, in other words. It turns out that over time the enumerated powers have indeed been interpreted so broadly that we are lucky to have the extra protection of the Bill of Rights.

With that in mind, let's look at how the right is constructed. There is the prefatory clause - "A well regulated Militia, being necessary to the security of a free State" - and the operative clause - "the right of the people to keep and bear Arms, shall not be infringed." In the decision in the Heller case, Justice Scalia writes that "apart from that clarifying function, a prefatory clause does not limit or expand the scope of the operative clause."

Now, I don't think there is universal agreement that you should separate the clauses like that. I say "should" because Scalia makes a good argument that you can. What dawned on me today is that in a world where the enumerated powers are read narrowly, we can read the Bill of Rights narrowly, too, because the Bill of Rights does not set the parameters of our liberties - it merely highlights a few of them.

Imagine the second amendment read: "Because people need to exercise, Congress may not pass laws prohibiting cartweels and front flips." Does that mean it can regulate acrobatics done for fun rather than exercise? Well, since the Constitution doesn't explicitly grant Congress the power to regulate acrobatics, the answer is "no" regardless whether we read the amendment narrowly (with the prefatory clause limiting the operative clause) or broadly (with the prefatory clause not limiting the operative clause).

In a world where the enumerated powers are interpreted broadly, anyone wishing to expand the scope of liberty will be inclined to interpret the Bill of Rights broadly, too. Currently we give Congress enormous discretion with regards to the enumerated powers, and I think that is not in keeping with the framers' intent. If we take a more originalist perspective regarding the enumerated powers, I think we will be more comfortable considering a more narrow interpretation of the Bill of Rights. In that kind of Constitutional order, we might conclude that the Second Amendment right to bear arms is indeed limited by the prefatory clause, contrary to the decision in Heller, while at the same time conceding that the scope of the liberty goes far beyond the Second Amendment because it is outside of the enumerated powers.

So according to this analysis, a limited federal government cannot place restrictions on the right to bear arms. Now, what about the states? Well, the pre-Civil War Constitution primarily placed limits on the federal government, not the state governments. So at the time of the framing, I'd say that the states could restrict guns in any way they want.

The Fourteenth Amendment changed the game by binding the states to the substantive guarantees of the Constitution. However, it didn't list precisely what those guarantees are. Over the past hundred and fifty years, the "incorporation doctrine" has been used to bind states to most of the protections of the Bill of Rights. In McDonald v. The City of Chicago, the Supreme Court upheld the incorporation of the Second Amendment.

So here's where it all comes together: If we have a broad interpretation of the Second Amendment (Heller), and then we incorporate that interpretation against states (McDonald), then there is little the states can do to experiment with different degrees of gun regulation.

But going back to how we should read the Second Amendment, it's not just a matter of whether the prefatory clause binds the operative clause in this case; it's a question of whether prefatory clauses bind operative clauses as a matter of interpretive principle. In a world where the enumerated powers are read broadly and Congress can do almost anything not explicitly prohibited by the Bill of Rights, we might not want to limit our rights further with prefatory clauses. But if we interpreted the enumerated powers narrowly and committed ourselves to a limited federal government, we could safely limit the operative clauses with the prefatory clauses without losing liberty at the federal level, while at the same time reducing the scope of our protections against the states. That could be a good thing or a bad thing, depending on your views. Personally, I would prefer more discretion at the state level, even if that means that some states will be worse than others, because I believe that competitive diversity yields improvement.

Thursday, December 13, 2012

When Democracy Works

The democracy game works when equals sit down to a series of negotiations on issues in which they all have a stake. Under those conditions, self-interested parties will agree to certain propositions in order to avoid the prisoner's dilemma situations that would otherwise leave everyone worse off. The first such proposition is majority or supermajority rule. You can't expect to win if you're not willing to lose. When it's a "this or that" situation, you want majority rule. When it's a "something or nothing" situation, it's often better to have a supermajority rule.

The second proposition is that all rules must bind all parties equally. The reason for this is that a group of diverse individuals will have diverse interests, so the same individuals will not likely be in the same factions at all times. If the winning faction uses its majority rule to gain an advantage in this game, many of those individuals will find themselves in the losing faction in subsequent games. The result will be that factions will extract greater and greater advantage when they win while putting themselves at greater and greater disadvantage when they lose. When this happens, all parties are made worse off. The solution is to agree upfront that all rules must affect all parties equally in order to avoid a series of asymmetric outcomes.

The US Constitution works because its framers were on a relatively even playing field. It was in the best interest of all parties to forego certain powers lest those powers be used against them on issues in which they are in the minority.

We all have an equal interest in freedom of expression and belief, self defense, infrastructure like roads and bridges, clean air, sound laws and courts, etc. These are areas where democracy should function relatively well because the above propositions may be observed. Unfortunately, we do not all have an equal interest in economic matters, so people do not feel compelled to follow the second proposition. Yet if we had the wisdom to follow it anyway and stick to general rules that bind all parties equally, we would avoid all these terrible prisoner's dilemma games and the deadweight losses they produce, and collectively we would be better off.

Wednesday, December 12, 2012

Allocative Inefficiency

Imagine a group of people all received video games on Christmas, but none of them received the game they wanted most. Then imagine a fairy came and replaced all their games with the games they valued highest. Everyone benefited from this, yes? Yet it would be very hard to quantify the surplus benefit each individual received by having their game replaced with a game they valued more.

Certain economists of a certain political stripe act like if you can't measure an improvement, it doesn't exist. Everyone would agree that in the above scenario the total welfare was raised even if it's not reflected in the GNP. Yet when it comes to talk about tax reform, some economists act as if allocative efficiencies are unimportant. They focus on the fact that the total number of games remains the same rather than the improvement in utility due to better allocation.

What is this related to? It's related to articles like this one from Ezra Klein:

GNP only measures the sliver of economic surplus that can be quantified. You can raise someone's welfare just by smiling at them. When you think about distortions in the economy, you can't just think about static effects on GNP. You have to think about the fundamental processes that optimize welfare both quantifiable AND unquantifiable and consider how our policies affect those processes.

And another thing: you don't have to affect growth "much" to affect the economy a LOT over time.

Monday, December 10, 2012

Richard Epstein Fan Site

Because I'm a huge nerd, I put together a fan site for Richard A. Epstein:

I figure the smartest person on the planet ought to have a fan site. Also, I think that man has the answers to all of our problems and I want to help disseminate his ideas far and wide.

Saturday, December 8, 2012

The SEC Will Ruin the JOBS Act

The SEC is going to ruin the JOBS Act. Below is a statement from the new head of the SEC regarding the issue that is the main reason I started this blog. Just look at this language: "I think everyone can agree that removing the ban on general solicitation, essentially allowing public 'offers' in private securities transactions, is a fundamental change in the securities markets. We must be vigilant about the potential consequences, particularly unintended consequences, of a significant change like this and consider ways to mitigate potential harms to the investor while preserving the rule's intended benefits."

Here's how I interpret that: "Congress naively passed a law that we don't like, so we are going to write rules that will render the new law useless and preserve the status quo, just as we are doing for Crowdfunding." Here's the statement in full:

    As you know, the Commission has proposed a rule that would end the ban on general solicitation in sales to accredited investors. We have received a number of helpful comments from a variety of differing perspectives. Many comments, including ones from the small business community, strongly support ending the ban as a step toward facilitating capital raising. Other comments have focused on potential consequences to investors of lifting the ban. I feel strongly that we must take these potential consequences seriously. I think everyone can agree that removing the ban on general solicitation, essentially allowing public “offers” in private securities transactions, is a fundamental change in the securities markets. We must be vigilant about the potential consequences, particularly unintended consequences, of a significant change like this and consider ways to mitigate potential harms to the investor while preserving the rule’s intended benefits. 

    People often frame this discussion as “balancing” the desire for easier capital formation against the need for investor protection. But I see this as presenting a false choice, and I hope that you do as well. A vital prerequisite to efficient capital formation is a market in which investors have confidence. If allowing general solicitation results in increased incidence of fraud or sales of securities to investors that do not have the sophistication to understand the risks and merits of a particular investment, we will have failed not only investors, but small businesses as well. In other words, regulations that protect against these risks — without placing undue burdens on businesses — will benefit all participants in the capital markets. On the other hand, we should not block this change because we are afraid that harm will result; it is the responsibility of regulators (and market participants as well) to determine how to obtain the benefit of the change while safeguarding against the downside risks to investor protection and the public interest.

    Accordingly, I hope that in your sessions today you will discuss and consider various safeguards that some commenters have suggested in response to the proposed rule. In particular, please take a look at the recommendations of the Investor Advisory Committee. For example, does it make sense to place some limitations on the forms of solicitation? To reconsider our definition of accredited investor? To include in the rule specific methods that issuers can use to verify accredited investors? To condition, on a permanent or temporary basis, the availability of general solicitation on the timely filing of the Form D? I am confident that we can find some common ground between the business and investor communities on these issues.

Tuesday, December 4, 2012

The Other Side of Dynamic Scoring

My recent post Tax Rates and Tax Revenues talks about dynamic vs static scoring of tax policy. In a nutshell, static scoring tells us a given policy's predicted effect on tax revenue if we assume that everything stays the same. Dynamic scoring tries to make revenue predictions based on assumptions about how the policy will affect behavior. When liberals promote a tax hike, they like to use static scoring and downplay the dynamic effects of tax policy; when conservatives promote a tax cut, they like to use dynamic scoring and exaggerate the effects that tax policy will have on the size of the pie. The problem with static scoring is that it's unrealistic, and the problem with dynamic scoring is it varies depending on the assumptions you make.

Like taxes, spending is also scored using either static or dynamic measures. Mark Thoma and Paul Krugman explain it in detail here.

The idea Krugman wants to convey is that spending creates an economic surplus, some of which returns to the government as revenue. It's a slick argument, but something feels not quite right about it. To what extent does government spending merely displace private spending? To what extent does present spending merely displace future spending? What about when that money is sent overseas to buy goods that depreciate quickly? What about when that money is allocated in ways that cause distortions or actually destroy wealth?

It seems to me that private spending still trumps public spending by a mile. Some extra public spending on infrastructure, where it is unlikely to crowd out private spending, might be a sensible measure to take when and if we are in a liquidity trap. But those articles were written in 2009; here we are at almost 2013 and there is talk about raising taxes while the economy is still in the dumps. So now we are talking about actually taking money from the private sector in order to maintain high levels of public spending, almost none of which is going toward infrastructure. I think it's a bad idea.

Saturday, December 1, 2012

Tax Rates and Tax Revenues

In a recent article titled The Great 2012 Cashout, The Wall Street Journal highlights how an expected rate hike on capital gains is affecting investor behavior. I sent that to a buddy of mine, and he responded with this article from the Committee for Economic Development as a counterpoint. That article argues that while changes in capital gains rates may spur large temporary changes in behavior, those changes have little long-run effects on revenue.

But if raising the tax rate on capital gains does not increase revenue, what does that say about capital gains? Doesn't it say that an increase in the rate is offset by a decrease in overall capital gains, so that on the revenue side the whole thing is a wash? Doesn't it matter that capital gains are decreased? If 10% of Pie A is equal to 30% of Pie B, what does that say about the size of the pies?

In a world where tax changes have no affect on behavior, a higher rate will yield higher revenue. But that isn't reality; we live in a world where taxes do affect behavior. When politicians tout the benefits of a tax increase, we have to question what assumptions they are making about the dynamic effects of that increase. If they underestimate those effects (as they have a strong incentive to do), the promised revenue will fail to materialize. A typical difference between liberals and conservatives is that liberals assume very small dynamic effects and conservatives assume very large ones.

To sell a tax cut, exaggerate the benefits by making very large assumptions about the effects of tax policy on behavior. To sell a tax hike, exaggerate the benefits by making very small assumptions about the effects of tax policy on behavior. If history shows that tax policy usually has a negligible long-run effect on revenue, the implication is that changes in rates are directly offset by changes in behavior. Our goal therefore should be to maximize the pie.

Saturday, November 24, 2012

Do you have a moment to talk about Gay Rights?

While giving my gay friend a tour of ASU, we were stopped by a guy who asked us if we had a moment to talk about gay rights. He explained that Arizona is one of 29 or so states in which it is illegal to fire someone for being gay. Sounds pretty messed up, right? This one's a no-brainer, right?

After talking with the guy, I thought for a minute about what might be the consequences of a law making it illegal to fire someone for being gay. Whenever I think about these issues, I first like to ask: what is the status quo? Do we live in a country where companies make it a policy to fire people for being gay? What currently happens to companies that have an overtly anti-homosexual policy? I believe the honest answer is that Chick-fil-a is the exception and not the rule, and that the vast majority of businesses know that bigotry is not profitable in the 21st century. So given that the problem of companies firing people for being gay is relatively small, the benefit of passing a law making that illegal would likely be small, too.

But what about unintended consequences? Employers like to be able to fire people at their own discretion. They want to be able to fire people for being abrasive, annoying to work with, dumb, whatever. When you make it illegal to fire someone because they are gay (or a minority or a woman or whatever), in effect you make it difficult to fire that person for any other reason. Unless you have carefully documented reasons for terminating the employee, you risk getting sued for discrimination. Despite its good intentions, the likely unintended consequence of such a law would be to make employers less willing to hire someone they know is gay simply because it will be more risky to fire them later.

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."

Wednesday, November 21, 2012

Go Musicals is thankful for...

Go Musicals is thankful for all the wonderful support we have received from teachers and students, friends and family.

Go Musicals is thankful for the brave directors willing to take a chance on a new musical.

Go Musicals is thankful for the young actors and actresses who share their light on stage.

Go Musicals is thankful for the incredible talents of the growing Go Musicals team.

Go Musicals is thankful for the opportunity to do something special.

To everyone reading this: THANK YOU FROM GO MUSICALS!

(I meant to publish this on my Go Musicals blog, but since I already posted it here by accident I suppose it'll do for my personal blog, too!)

Monday, November 19, 2012

Dear Entrepreneur

Everything will take longer and cost more than even your worst-case projections.
"Simple" engineering or coding challenges will turn into nightmares. People you contract will let you down, jerk you around, fail to deliver on schedule. There will be cost-overruns. You will not stay on budget. You will not stay on schedule.

Nothing will work as expected. 
Your marketing efforts will fail. You will say things like "even if I only get a 1% response rate" and then you will get zero responses. Your website won't work right on some browsers and you won't know why. People won't show up to your event. The printer will screw up your order. Systems will crash at the worst possible moment. People won't buy tickets. People won't sign up. A vendor will send you the wrong product and it will be too late to fix it. People will be nonplussed by your beautiful graphic designs. You will bind yourself in partnerships and then your partner will not deliver. You will give the perfect pitch to the ideal customer, and they will ignore you.

You will blitz too early.
You will launch your website before it is ready. You will blow your budget on marketing before you are ready to handle sales or have properly tested out your product or service. You will make a bad first impression on all the people who are easiest to access, and those people will not give you a second chance. They may be your friends, but they will not visit your website again. Fortunately...

Your blitz will be a spectacular failure.
Most people won't visit your website or look at your product or go to your store anyway. I'm not saying they won't buy your product. I'm saying they won't even look at it. Not even your friends. So don't beat yourself up for blitzing too early, because nobody paid attention anyway.

You will be taken down a peg or ten.
You told everyone what you were doing. You told everyone what you would achieve. You were confident. You brushed off the advice of others, because you knew better than they. You knew why others had failed, and you would not repeat their mistakes. Then you failed once. Then again. Then again and again. No one attended your event. No one is visiting your website. No one is buying. You are hemorrhaging money. Things aren't working, and you can't make sense of why. You will have to eat your words. You will be embarrassed. You will learn to respect other entrepreneurs, because now you understand what they have been through. You will learn humility.

Failure will become a friend.
You will discover that you learn more from your failures than from your successes. You will learn to listen to the experiences of others - especially the experiences of other entrepreneurs. Each failure will leave a scar on your ego, and you will begin to cherish your scars. You will learn to give careful consideration to all advice you receive, even really bad advice from people who have no idea what they are talking about. You will learn to hedge your bets and to experiment cautiously. You will learn to expect most efforts to fail, and therefore to moderate both your spending and your bravado.

It might take years, or even forever.
For a long time you may see no sign of growth. You will not know when or even if your venture will ever become viable. Remember that multi-million dollar startups, funded by the most successful business people in the world, frequently fail to ever take off. Failure happens more often than not. But failure is not defeat. You will have many failures, but only you can decide when it is time to accept defeat. That uncertainty will become even more stressful than it sounds.

You will work your ass off.
Most people will have no idea how much you're working. They will have no idea how unexpectedly complicated and risky everything turns out to be. Unless someone has started a business, they cannot know. You will have to learn a million different things, and you will get no credit for it. Your job will never leave you; you will work day and night. The weight of the world will be on your shoulders. You will take horrifying risks. You will calculate your hourly wage and discover that you could be making more money digging ditches in Uganda. You will lose your savings and years of your life. Yet your friends will consider you unemployed and expect you to drive them to the airport whenever they need it.

You will learn to seek advice.
The same advice you used to brush off, you will now seek out. You will want to hear as many perspectives and as many case studies as you possibly can. You will take people to lunch and listen to them. You will learn the phrase: "Will you please help me?" You will learn to show your gratitude to people for sharing their input, even if they clearly have no idea what they are talking about. You will learn that it's not about finding other people to tell you what to do, but rather it's about finding new insights to help you make better decisions.

Some people will get lucky, but you will not.
Some people will have a much easier time with their venture than you will. Some people will make the right contact, find the right niche, get re-tweeted by the right celebrity, and they will be an overnight success. This will not happen to you.

People will look down on you.
When they see you struggling, they will blame you. You should have listened to them. You're doing this or that wrong. It was a bad idea to begin with. They always knew it wouldn't work. You should have gotten a real job. It's time for you to grow up.

Your friends will not support you.
Your friends are not your fans. You must resist the impulse to resent your friends when you realize that they do not care at all about what you are doing. You can't build a business on friends, anyway. You need fans. Fans love your product or service for what it is, not because they are your friends. Expect your friends to let you down. Expect them not to listen to your album or read your book or watch your video or try out your product or eat your food or play your game. This will be a tough one to deal with, but try not to hold it against your friends.

Your fans will sustain you.
You need a fan. You need someone to love your work and believe in what you are doing. This might be your partner, or it might a customer. You will have low moments, moments of self-doubt, moments in Gethsemane. At times like that, you need fans, not friends. You need people who truly believe in what you are doing when even you do not.

Make art.
The way to gain fans is to make art. Do work that satisfies yourself. Give customer service you are proud of. Make food so good that it literally excites you to watch others taste it for the first time. Design a logo so beautiful you find yourself staring at it for minutes at a time on your computer screen. Do work that you believe in, then put it out there where others can find it. Don't expect the whole world to fall at your feet, but with a little luck you will get a slow trickle. Cherish your fans, because they are few and precious.

Kevin Frei
CEO of The Company Player, a theatre-based corporate team-building program (defunct)
Partner in SAMI, a bio-tech venture (defunct)
Author of three unpublished novels written roughly at ages 12, 16, and 21 (defunct)
CEO of an independent film production company that failed to raise funding (on hiatus)
Independent game developer (defunct)
CEO of Go Musicals (growing... slowly)

Tuesday, November 13, 2012

The Entrepreneur Bug

I'm feeling entrepreneurial.

I've been marching to the beat of my own drum for most of my life. Financially it has been a disaster, but I've certainly had some incredible experiences.

I'm ready for a new challenge. Building Go Musicals has taught me more about starting a business than I could ever learn in school. Now I'm anxious to take those skills and apply them to a new venture.

Sunday, November 11, 2012

Drake Equation / Cosmic Super-Download

That we are not alone in the universe is a statistical given. The odds that we will ever hear from an alien civilization are formalized in the Drake Equation:

N = R^{\ast} \cdot f_p \cdot n_e \cdot f_{\ell} \cdot f_i \cdot f_c \cdot L
N = the number of civilizations in our galaxy with which communication might be possible (i.e. which are on our current past light cone);
R* = the average rate of star formation per year in our galaxy
fp = the fraction of those stars that have planets
ne = the average number of planets that can potentially support life per star that has planets
f = the fraction of the above that actually go on to develop life at some point
fi = the fraction of the above that actually go on to develop intelligent life
fc = the fraction of civilizations that develop a technology that releases detectable signs of their existence into space
L = the length of time for which such civilizations release detectable signals into space[5]

With new "super-Earth" discoveries becoming a regular occurrence due to new detection technologies, it's worth thinking about the implications of a relatively high value for fp, which now seems to be the case. Are the odds looking particularly good that we will detect an alien signal within the near not-too-distant future?

Luckily for us, the dedicated nerds at SETI (Search for Extra-Terrestrial Intelligence) have been busy scanning the sky for decades. The fact that they haven't found anything yet shouldn't discourage us - they can only "listen" to small patches of the sky at a time. Within our lifetime, as technology improves, we should be able to determine fairly conclusively whether any alien signals are reaching Earth.

If we do hear something, it'll probably be from a very long time ago. It will be a look into the past, not an opening for a dialog. Maybe it'll just be some alien TV signal. Or maybe it will be a message.

So here's the part that blows my mind: what if the message contains the instructions for the next thousand years of science and technology? Nuclear fusion, artificial intelligence, the Grand Unified Theory? What if it's like in the movie Contact, and we get some kind of cosmic super-download that changes everything?

Though it may seem like a ridiculous notion, it may not be so implausible. It's looking more and more like our galaxy is chock-full of planets.

Saturday, November 10, 2012

#JoeStiglitz Endorses This

Nobel Prize winning Economist Joe Stiglitz tweeted this video:

But I just don't get it. People keep saying that the US can't default on its debt because our debt is denominated in currency we control. So? Was default ever the issue? Inflation expectations are the problem. Maybe I'm just not understanding it correctly, but all this "zero percent of default" stuff seems really misleading to me. If it becomes clear to markets that the US will inevitably have to debase the dollar in order to make good on its bonds, then why would markets be willing to pay the same price for those bonds if they expect a lower real return? Ultimately, doesn't all spending have to be paid for through taxes, whether now or in the future? If bond markets lose faith that we will be able to pay for the debt without raising inflation, then our ability to borrow will be compromised; and if we can't borrow to finance the size of government we want, we will have to either raise taxes or cut spending in order to be solvent. I get that we will never default on our debt obligations, but servicing the debt is only one part of government spending. We can't pay for Medicare and the military and everything else just by printing more money. Therefore if we lose our ability to borrow, and if tax revenues are not sufficient to pay for our desired level of government services, what choice will we have but to raise taxes or cut spending? This guy seems slippery and deceitful to me:

Thursday, November 8, 2012

The Basics

Speaking with a friend of mine who grew up in a communist country, it occurred to me that most people (even those educated here) have not been taught the basic dynamics of how an economy works. So I think it's worth walking through some of the main ideas. The key economic terms are in bold.

John is fast at making bread, but he is slow at making wine. Jane is fast at making wine, but she is slow at making bread. Each has a comparative advantage.

John values his second loaf of bread less than a bottle of wine. Jane values her second bottle of wine less than a loaf of bread. Through division of labor, each can do what they do best and then they can induce each other into making a trade at the end of the day. Because John values Jane's bottle of wine more than he values his second loaf of bread, and because Jane values John's loaf of bread more than she values her second bottle of wine, each ends up with something they value more than what they had originally. They played a positive sum game because the transaction resulted in a higher sum value than when they started. Because both parties benefited and no parties lost out, we call this a Pareto improvement or win-win.

So, John values the bottle of wine more than his second loaf of bread. The difference in value to him is called "profit" if we think of John as the seller, or it is called "consumer surplus" if we think of John as the buyer. It's the same thing.

Now, suppose Jane breaks the rules and makes John give her a loaf of bread against his will. Jane values the bread less than John values it, but she takes it anyway. This coercive act is negative sum because the bread in Jane's hands has a lower value than it had in John's hands. Fortunately for John, the government is there to punish coercive acts of aggression and he may get his bread back after all. But first he has to hire a lawyer. Unfortunately, the lawyer has plenty of bread and doesn't need any more. But the lawyer does like money.

What does John do? Well, he can take his bread to a market place where it will be converted into a common currency, aka money. John makes a profit from the conversion because once again he was able to engage in a positive sum game with a buyer who was willing to pay John more for the bread than it cost John to make. Now John is able to take that money to the lawyer and trade it for the legal representation that will help him get his bread back from Jane.

Now that John is free from piracy because Jane is in jail, John begins to ramp up production of bread. He finds that as he makes more and more bread, the marginal cost per unit of each loaf gets cheaper and cheaper because he is able to buy wheat in bulk and develop efficient bread-making processes. In other words, he is using economies of scale to make bread more cheaply. That means when he goes to the market to play positive sum games with buyers, his profit margin is larger because each loaf of bread costs him less to make. Notice that even though his profit has increased, it has not diminished the consumer surplus that the customer gets from the transaction. John's gain comes not at the customer's expense, but due to his own improved efficiency.

John soon realizes that if he lowers the price of his bread, he can induce more people to buy it. Even at a lower profit margin, he can increase his net profit. However, if he lowers it too much then his net profits will decrease because the added customers won't make up for the lower profit margin. John needs to determine the optimal price that maximizes profits. As an added benefit, those customers who were willing to pay the higher price now find their consumer surplus increased because the cost of the bread has gone down.

But one day John wakes up with an evil gleam in his eye. He finds a do-gooder who believes that eating more bread is essential to a healthy diet, and he finds a politician who wants the support of the do-gooder in order to get elected, and he proposes a coalition. John is much smarter than the do-gooder and the politician, and he tells them that if only there were a law making everyone eat bread then everyone would be healthier. So John, who is wealthy from his bread business, finances the politician's campaign on the do-gooder's platform of promoting bread through laws requiring everyone to buy bread. Pretty soon the politician is elected and the bread law goes into effect. Now everyone has to buy John's bread, and he no longer needs to induce them by offering them a consumer surplus. So John exercises his monopoly power and raises prices.

But wait! Now that John has raised his prices so high, other entrepreneurs realize that they can make a profit by undercutting John's price. So now there are three bread-makers competing for the same customers, and these competitive forces force John to lower his prices in order to retain customers. But unfortunately for all the bread-makers, their bread is identical. None has a comparative advantage over the other, so they must resort to constantly undercutting each other's prices and a full-fledged price war ensues, driving the profit margins down close to zero. John knows he cannot stay in business with zero profits. He must find a way to gain a comparative advantage over his competitors. He tries going to the politician to gain an advantage through regulation, but the politician has been replaced with a libertarian who doesn't play those games. (wink!) He considers talking to his competitors so they can form a cartel and engage in price-fixing, but with that libertarian in office he knows he will get sent to jail for engaging in illegal anti-competitive activities like cartelization. John decides he needs to find a way to increase his profit margin by improving his efficiency once again. By hiring an employee, John decides, he can increase his production of bread further still and lower the marginal cost per unit. So John hires the best employee he can find.

Now that John has the best employee, efficiency is improved and the marginal cost per loaf of bread decreases, allowing John to have a larger profit margin and higher net profits overall. But this comparative advantage is short-lived, because before long his competitors start trying to steal his employee. They offer his employee higher wages than John is paying in order to induce him to go work for them. John could replace his employee, but the replacement would be less skilled and therefore less productive, yielding a lower return on investment. John calculates the monetary value of his employee to the business, which is the total amount of profit that results from the employee's productivity. Then John subtracts the employee's wages from that value. The difference between what John pays the employee and what the employee is worth to the company is the surplus. In order to retain the employee, John must give up some of that surplus and pay the employee a higher wage. But there is an upper-bound to how much John will pay his employee: he will not pay the employee a wage that is higher than the employee's value to the company. Without some surplus from the employee's work, John has no reason to keep him. The employee can raise this upper bound only by increasing his own productivity, and thus his total value to the company.

Because his competitors have started a bidding war for his employee, this upward pressure on wages has once again eaten into John's profits. He must find a new comparative advantage.

So John begins to build up the brand of his bread. He improves his relationships with vendors. He builds consumer trust and confidence. He experiments with different kinds of bread to attract new customers. He develops special recipes that are trade secrets, his intellectual property, that his competitors can't copy. All of these things are comparative advantages that allow John to charge a premium for his product and maintain a healthy profit margin. All of these advantages only work because they provide greater consumer surplus to customers and induce them into positive sum games. But due to competition, none of these advantages last long; John must continue to innovate in order to for his company to survive.

The final part of this story comes when the employees at the different bread-making plants begin to unionize. The employees decide to form groups that allow them to negotiate for better working conditions. The employees, too, face competitive pressures from other workers with comparative advantages trying to win their jobs. So what started as a measure to improve working conditions becomes an effort to increase job security. Unfortunately, if they demand too much they will face competition from other unions, so the unions begin to lobby politicians. The libertarian politician is gone now and replaced with someone else. That politician begins to pass laws that disrupt the natural marketplace, promoting cartelization and monopolization among unions. The same behavior that is deemed toxic among competing companies is enshrined in the law for unions. With the power of monopoly, the union does exactly what John did when he had a monopoly - it begins to drive up prices, forcing the bread-makers to raise their prices on consumers in order to maintain a profit margin.

When bread-makers in a nearby country hear that the employees are unionizing in the United States, they ramp up production, knowing that the American bread-makers will never be able to compete now that they are paying inflated wages. The market gets flooded with foreign bread, and the American bread-makers are forced to slash prices below profitability in order to compete. Pretty soon, the American bread-makers are bankrupt. They go out of business and all the workers are laid off. The end!

A couple observations: Notice that everything everybody did in that story was entirely self-serving, yet in every positive sum game there were at least two beneficiaries. This is that invisible hand that Adam Smith wrote about. Also notice that whenever possible, the individuals first tried to do something coercive. Jane stole from John. John lobbied for a bread law to force people to buy bread. John considered forming a bread cartel with his competitors to force customers to pay more. The workers lobbied the government so that their unions could attain monopoly power and coerce the bread companies to pay them more. Notice also that in the case of Jane stealing John's bread, the government is the solution because it punished coercion. Notice also that in the cases of monopolization and regulation, the government was the problem, either sanctioning coercion or doing it itself. Libertarians advocate for a government that prohibits private coercion while avoiding public coercion. That's what all this "limited government" stuff is about.

That went on a lot longer than I planned. And I just realized I didn't mention supply and demand once lol.

Tuesday, November 6, 2012

The Libertarian in Me

The libertarian in me is thrilled that a Democrat is in office to champion civil liberties, but the libertarian in me is sad that a Democrat is in office to spend money. But the libertarian in me doesn't think the Democrat in office will really accomplish much for civil liberties, and the libertarian in me doesn't think the Republican would have spent much less money if he had won. All in all, the libertarian in me is damn glad to be living in America instead of just about anywhere else on Earth. Except maybe Switzerland. If I could be living in Switzerland I'd tell the libertarian in me to f*** off!

Voting for What's-His-Name

Today I'm casting my ballot for what's-his-name, the Libertarian candidate. Evidently if he gets 5% of the votes then the Libertarian Party will get to participate in the debates next year. Since I think the Libertarians get most of the big issues right, that's how I'm I'm going to vote. For what's-his-face. Off the the polling place I go!

Saturday, November 3, 2012

Glass Half Empty / Taking Inventory

I'm having a glass-half-empty day. I need to figure some things out. Time to take inventory.

The world is full of things worth celebrating, worshiping, and adoring. I love the final fantasy music coming out of my roommate's room. I love this laptop I got for a steal on craigslist. I love the light coming in through the window. I love the little grumble of the icemaker in the fridge. I love the way this table feels cool on my elbow. i love how good it feels to scratch my mosquito bite. I love that my grandma is celebrating 95 years of life today. I love that today in New York millions of people are facing the daunting but wonderful project of rebirth. I love that Trey Parker is funny. I love that leaves are green, that they drink sunlight, and that they wiggle in the breeze. I love that three thousand years ago people stacked bricks to make giant tombs that survive today. I love that there's not a country in the world where someone isn't falling in love with someone else right now.

Friday, November 2, 2012

The Misleading CRS Report

Two friends have now emailed me articles about how Republicans suppressed a "non-partisan tax report" that refutes some key conservative economic ideas. The report in question is from the Congressional Research Service and examines the effects of marginal rates in growth and inequality.

The report was actually brought up in a great Facebook debate I had a week or two ago, so I had already looked at it. I have a lot of problems with it.

So what's wrong with the report? For one thing, the report does things like this: On page 2 we read, "Although the statutory top marginal tax rate was over 90% in the 1950s, the average tax rate for the very rich was much lower." Then on page 9 it says, "The top marginal tax rate in the 1950s was over 90%, and the real GDP growth rate averaged 4.2% and real per capita GDP increased annually by 2.4% in the 1950s." If the real tax rates was "much lower" (it says 60% on average), then why still throw around the misleading 90% figure?

Looking at Figure 3, we see exactly what we would predict: as the marginal rate rises, savings go up. As the marginal rate lowers, investment goes up. The report says the data is too "statistically insignificant" to prove causation. That's true, but it certainly corroborates causation.

The report says that there is "no conclusive evidence... to substantiate a clear relationship between the 65-year steady reduction in the top tax rates and economic growth." Ok, I agree that tax rates have not been the dominant factor in the world economy for the past 65 years. "However," it goes on, "the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution."

Here's how I look at this. Do marginal tax rates affect the distribution of the pie? Absolutely. Do they affect the size of the pie? Absolutely. Do they affect the distribution of the pie more than the size of the pie? The report would like to suggest that is the case, but it does so just by plotting data points from the past 65 years against the marginal tax rate, as if that were the only thing going on over that time. I think it is silly to look at these 65 year trends as if the other variables were controlled. A shift away from unions and blue collar industries due to competition abroad has undoubtedly been a much bigger factor than tax rates when it comes to income distribution. And with regards to growth, one thing to consider is that marginal rates have not fallen nearly as far as is suggested when we throw around the misleading 90% figure. Another thing is that of course GDP growth hasn't been commensurate to the decrease in marginal rates over 65 years. What a crazy suggestion, as if post WWII growth rates could have increased for 65 years in a world that was catching up!

So how do we measure a policy's positive effects over 65 years if we can't isolate it from other factors that had negative effects? That's the problem with taking such broad data and using it to shape a narrative. It's not very useful or instructive, and it strongly implies things that aren't necessarily true. I think people are right to criticize this report.

Thursday, November 1, 2012

Night of the Living Dead: the Musical

Introducing my latest musical! When dead celebrities rise from the grave with a hunger for human flesh, a musical writing team, an executive, a lawyer, and two young lovebirds take refuge in an abandoned country house. They soon discover that pop star zombies are the least of their worries as they uncover a conspiracy by an ancient organization bent on taking over the world. Zombies, Karate Rangers, lawsuits, pan-dimensional beings, and supernatural forces of good and evil clash in this loose musical adaptation of the classic George Romero zombie film.

This Sh*t Is Bananas!

Went out to karaoke with my buddies Kelvin and Brian tonight dressed as a banana for Halloween. Some idiot yelled "queer" at my friend (who is gay) when he was singing "Try a Little Tenderness," and some girl at the bar threatened to kick the guy's ass. Happy Halloween!

Wednesday, October 31, 2012

The Meaning of Rainbows

Genesis 9:13 goes: "I do set my bow in the cloud, and it shall be for a token of a covenant between me and the earth." (KJV)

This Bible verse illustrates an ancient view of the rainbow as the deity's weapon aimed up at the sky as a sign of victory. It says: "I am your protector. I battled the storm, and I won."

You'll come back stronger than before, NYC. :)

Tuesday, October 30, 2012

Oil and Diamonds

The Film Bar recently screened a very interesting movie called The Ambassador about a Danish guy who buys diplomatic credentials to go undercover into the world of blood diamonds in the Central African Republic. It really showed how totally dysfunctional and corrupt that region is, which got me thinking about valuable natural resources like oil and diamonds. I remember something a friend of mine once said regarding the Middle East: "Why would the governments of those countries have any respect for their people when all their wealth is pulled out of the ground?"

When wealth comes from the productive capacity of the people - their ability to farm land, process and refine goods, innovate, etc. - then the state benefits from empowering people to be productive through freedom of contract, equal treatment under the law, stability, etc.. That sort of society is well suited to democracy and is inclined to prosper through mutually beneficial, voluntary arrangements (i.e. free enterprise).

But whenever a country's primary source of wealth is raw materials, there is always a high risk of political dysfunction. This is particularly true when the materials in question are highly valuable in their unprocessed form, like oil and diamonds. Ideally you want your natural resources to spur the development of other industries. For instance, iron ore deposits could lead to a thriving steel industry, which could lead to manufacturing, etc. But when you can get fabulously wealthy just by pulling a resource out of the ground and selling it as-is, then land rights are all that matter. Suddenly it begins to matter a great deal how those land rights are first established. It's not like in the US where you could just claim as much land as you could "improve" (farm). Nor is it particularly fair to base claims on ancestral conquests, though this is the norm in the Middle East as in Europe. The remaining alternative is to claim the land for the public at large, which is where things get tricky.

Whenever you have public resources, you must have stewards of those resources - i.e. the politicians in charge of making those resources productive. When those resources are vast diamond or oil deposits that fetch huge returns on investment with minimal refinement, the inducement to corruption is huge. It seems to be virtually impossible to get a functioning political system with that as your starting point.

So how on Earth do you socialize the wealth from oil and diamonds in a way that truly benefits the public and not just the ruling class? Some of the Scandinavian countries, which sit on big oil reserves, seem to have done a pretty good job of it. I don't know the details of Sweden's oil industry, but I assume the oil fields are privatized because you don't want the government trying to run an industry like that. How were those land rights established? My guess is that, like the rest of Europe, most of the land rights probably pre-date the usefulness of oil. But that's ok because another means of socializing the wealth is through super high tax rates.  It may be that where a disproportionate amount of your society's wealth comes from raw materials it makes sense to tax the hell out of it in order to redistribute it. The situation in the Middle East where virtually all of the wealth is concentrated in the hands of the landowners is fairly repugnant, I believe, and could possibly be remedied by a different tax system.

In a situation like Africa where those land rights might be less established, I would think the prudent thing to do would be to auction off the diamond mines to the highest bidder. You want to privatize those resources because if the government tries to run that business you will just get endless wars and corruption. If the bidding process is kept open and competitive, not favoring local bids over international bids, then the mines should fetch the optimal price. The mines could even be leased rather than sold outright. But the challenge, of course, is actually getting that money to the people and not letting it get captured by political corruption. Without angels in charge, it might be impossible.

One way to distribute the money raised from the auction might be to just cut everyone a check. But how do you pull that off logistically? Or maybe you hand it out as a tax credit. But wouldn't that leave out the unemployed who aren't filing tax returns? I'm not sure how you would pull something like that off even in America where we have a vast and powerful IRS. African countries don't have anywhere near the bureaucracy to manage that kind of a wealth transfer. So instead you can try to distribute it through social programs, infrastructure improvements, etc. But now you're back in a situation where every single expenditure is vulnerable to political interests and corruption. That's not a place you want to be, but it might be the only way to do it.

Of course, then you're also stuck with the risk of short-circuiting the private economy by creating all these social programs. How do you ensure that money raised through the auction of public resources is spent in a way that benefits the public fairly but doesn't crowd out private investment and development and doesn't produce a dysfunctional government? You are still stuck with a government with no real accountability because wealth comes from property rights rather than from the productivity of the people. It seems like oil and diamonds are more of a curse than a blessing.

How can functioning 21st century societies develop on a continent whose political institutions lack legitimacy, whose wealth comes from the ground, and whose property rights are not clearly established? I think this all goes to the chicken and egg question of sequence in Africa. It's a hard task indeed to establish legitimate, accountable institutions without a productive populace, and it's hard to foster a productive populace without legitimate, accountable institutions. If you can start from scratch you might have some hope of crawling your way up, step by step. But when you start with oil and diamonds, forget it.

Sunday, October 28, 2012

Karate Rangers!

In Night of the Living Dead: the Musical, Chuck "the Antivirus" Norton leads a militia of Karate Rangers to defeat the zombie hoard. Unfortunately they are waylaid by a lawyer representing the zombie author of the original Chuck Norton joke (of which all subsequent Chuck Norton jokes are deemed to be unauthorized derivatives) who is suing them for copyright infringement. Karate Rangers!

Saturday, October 27, 2012

Friday, October 26, 2012

Freedom, Power, or Happiness

A friend of mine posed this interesting question to me in an email:

"Suppose someone put three jars on the table in front of you and told you to choose one. In the first jar was Power, in the second was Happiness, and in the third was Freedom. You could have whichever jar you choose but at the risk of losing the other two. Which would you choose?"

Of course I would choose Happiness. It would be easy to have power or freedom without happiness, but for me happiness entails a high degree of freedom and some measure of power. And isn't happiness the ultimate measure of utility anyway? What use are freedom or power if they don't bring happiness?

But what if, you might say, by having power you could give happiness and freedom to others? Wouldn't it be selfish to choose happiness? Well, I would dispute the proposition that you can give happiness and freedom to others through power. I suppose it's easy to imagine scenarios where power could liberate the oppressed and lift up the downtrodden, so it depends on the extent and type of power we're talking about. But in general I think that happiness and freedom are not things we can grant each other. They have to come from within.

At any given moment we all have two of those jars on the table, and we don't have to pick just one.

Thursday, October 25, 2012

Consequentialist Libertarianism

If growing disenchantment with political parties and mainstream ideologies has got you on the market for a new label, let me suggest my personal favorite, "Consequentialist Libertarian."

It's a lot like being a normal libertarian, but the standard criticisms don't apply to you. Whereas normal libertarians rally around Ayn Rand and controversial Austrian economists, our consequentialist champions include intellectually unimpeachable giants like Milton Friedman and Richard Epstein. We warn against the dangers of bad monetary policy, but we don't concoct paranoid conspiracies about the Federal Reserve or decry fiat currency as illegitimate. We think there is an acceptable level of government debt, and some of us are even open-minded to certain limited Keynesian measures when the economy is unhealthy.

We don't think the government and taxation are inherently evil. We agree that certain government functions are essential. We even agree that certain non-essential government functions provide enough benefit to make them worth doing. But for us, the presumption is always against government, against regulation, against taxes, because we believe that government has a pernicious tendency to overreach, to bungle, to distort, to entrench, to screw up the balance. We believe in separating the intent of a given policy from the actual consequences of that policy. We are consequentialists who find that nine times out of ten libertarian prescriptions yield better consequences than other policies. And we just love to share empirical evidence as well as deep theoretical reasons for why this is so.

I think a lot of folks are Consequentialist Libertarians but they just haven't taken up the label. People are nervous to associate themselves with the more wacky libertarian element. But on many policy matters, I think we're actually right in line with mainstream economists.

Wednesday, October 24, 2012

Tenants from Hell

My dad owns a rental property in Surprise, AZ. The recent tenants very thoughtfully gave us some remodeling suggestions before they moved out.

an angry teen

Apparently the kid was training to be a boxer. The carpet is a horror scene. How do people do this? How do people live like this?

I spent the last few days patching drywall, replacing doors, and painting. My friend Stuart helped. While on a lunch break we got talking politics. He said that if he were dictator (a proposition he relishes) he would round up everyone with handyman skills and send them into the ghetto where they would teach folks how to fix up and care for their homes. Then, he believes, people would take pride in their homes. But Stu, I said, look at the house we're working on now. This was a nice four bedroom home in a fairly new neighborhood in Surprise, and look what the folks did to it. We have every opportunity and incentive to care for our own bodies and our own homes, yet many people do not. You can't pin that one on the 1%.

A scene like this nightmare house ruins any fantasy I might have that humankind can ever achieve any kind of utopia through sound governance, education, and economic policy. Some people are just awful.

Sunday, October 21, 2012

Does the Romney Tax Plan Add Up?

Recently Romney suggested capping total deductions at a fixed amount in order to make his tax plan revenue neutral. This would seem far more politically attainable than trying to eliminate specific deductions, which would certainly rile up the special interests that benefit from those deductions.

Critics are saying that "the revenue raised even from the stingiest of Mr. Romney’s proposed caps, $17,000, would not come close to replacing the money lost from lowering rates 20 percent and making the other tax changes he proposes." But when they say "money lost," the question is: compared against what baseline? As the Tax Policy Center notes: "As usual, the current law baseline has all expiring tax cuts actually expiring, while the current policy baseline has almost all of them  permanently extended." Whether the Romney tax plan could be revenue neutral depends crucially on whether you take for granted that the Bush tax cuts will expire. You might point out that those tax Bush tax cuts were supposed to be temporary, but I would argue that "temporary" never means temporary when you're talking about tax cuts, tax hikes, spending, or any other government activity. "Temporary" means "pass this now and we'll fight about it later," and I think most people know that at the outset.

So compared to the baseline in which the Bush tax cuts are extended, would Romney's tax plan be revenue neutral? I've been reading claims that it would add about $5 trillion over ten years over and above the Bush tax cuts and only recapture about $2 trillion. So if that's the case, then it looks like no, it doesn't add up.

There are still a couple more things to consider. First is that there's a difference between static scoring and dynamic scoring. Static scoring asks: are tax cuts directly offset by other revenue sources, such as closed deductions? Dynamic scoring asks: are tax cuts offset by additional revenue due to increased growth which the cuts could spur? Greg Mankiw has a great blog post on this issue. It's relatively easy to look at the static effects of a change in tax policy, but predicting the dynamic effects is much more difficult and requires making a lot of assumptions. Statically scored, Romney's plan seems to fail the "revenue neutral" test. Romney has made comments that suggest he is relying on increased growth in order to make his plan work out. That's a lot more dubious, and I think a lot of people agree that the affect on growth would probably be too small to fully recover the lost revenue. It's just too optimistic.

The second point to consider is that Romney says his tax plan would not add to the deficit. My hope is that we would keep him to that promise by making him come up with a plan that is deficit-neutral when statically scored. That would likely mean higher marginal rates than those he is currently proposing. If he could directly offset the rate cuts with the deductions cap, then I think it would be a step in the right direction. As it is now, however, I think his target for marginal rates is probably too low to add up the way he says it does.

On the other hand, his tax plan paired with aggressive entitlement reform and cuts to the military could provide stimulus now (through higher deficit spending) while balancing the budget long-term on the spending side. That is actually what I would prefer.

Saturday, October 20, 2012

No Advertising Allowed

If you ever find yourself wanting to sell equity shares in a company to investors in order to raise capital, beware: you are walking into a legal minefield. Generally speaking you are not allowed to advertise an investment offer to people you don't already know unless you are going through the proper channels of Angel Investors and Venture Capitalists. You can't just go asking folks at a cocktail party or you'll be breaking the law. It has to do with whether an offer qualifies as "public" and is therefore subject to stricter SEC scrutiny.

I've been complaining about this for a long time. I touched on the subject in my post about Title II of the JOBS Act being a ticking time-bomb for the SEC.

What I find interesting is that there are similar rules in other industries. My friend Barry is a newly minted attorney here in Phoenix and was telling me about how he needs to build up a client base. He pointed out that attorneys can't legally solicit clients unless, if I understood correctly, there is a specific known need. That's why you'll see lawyers on TV advertising specific legal services specifically to people in specific situations - "if you were recently in a car accident," "if you participated in this medical trial," "if you took this prescription drug," etc. But you are NOT allowed to put out an ad that says: "Hi, I'm Joe. I graduated in the top ten percent of my law school class at Blah Blah University. I am establishing my practice here in Such-a-town and ask that you keep me in mind the next time you are seeking legal services." The rationale for such a law? Well, it ostensibly has to do with maintaining the dignity of the profession and safeguarding people from unscrupulous lawyers. But in reality it is just there to protect well-connected lawyers from the upstart attorneys who could steal their clients. Protectionism plain and simple.

A plastic surgeon told me not long ago that the same thing almost happened in the medical profession, but entrepreneurial doctors fought it in court on free-speech grounds and won.

The truth is, good legal counsel and good doctors are hard to find. It makes no sense for us to allow laws that bar advertising solely to protect individuals from competition. No business person who has learned the lesson of "you get what you pay for" would throw out their trusted attorney because somebody in the yellow pages offered their services cheaper. However, attorneys might find it much harder to gouge families when settling the estate of a deceased person if others were allowed to advertise the same service at a lower cost.

The idea that we ban public advertising and solicitation in the name of "consumer protection" in any industry is bananas. For one thing, it's much easier to catch fraud that is committed in public than it is to catch fraud that is committed in private. For another thing, public advertising helps us to better evaluate the offers being made to us in private. The free exchange of information is the greatest consumer protection of all. Restricted communication is exactly the opposite! This is true for the legal profession, the medical profession, and investment as well.

Competition favors excellence and it benefits consumers and hard workers alike. The freedom to advertise services and solicit customers is essential to competitive markets. Any time we see a ban on advertising in any industry, a red flag should go up in our heads that the law is only there to protect the entrenched interests of some against the interests of others.

Wednesday, October 17, 2012

Is Romney's Tax Plan Stimulative?

In response to my last post my buddy passed along this great article on the Romney tax plan:

I get from it two good critiques:

1. The author is skeptical that Romney's tax plan is politically achievable.

2. While he agrees that it is probably good for long-term growth, he argues that it will not do much to grow the economy in the short-term.

Point 1 is a valid cause for concern. Point 2 says only that Romney's tax plan is good but not necessarily very stimulative because taxes don't actually change, only tax composition. He doesn't say it would have an adverse effect on growth. Personally I think it could help summon the "confidence fairy" which would be at least a little stimulative in the short-run, but maybe we do need more stimulus right now.

So here's an idea: cut tax rates by 20%, but phase in the cuts to deductions over two or three years. That'll give us some temporary stimulus that targets those very areas we deem important enough to give deductions for currently. Then if we keep deductions capped at $17,000 and don't peg that to inflation, hey it'll even turn into a modest incremental tax increase. So the Democrats would get stimulus now and a tax increase later, and the Republicans would get a flatter tax code with less distortions.

Tuesday, October 16, 2012

Tax Thoughts for Tonight's Debate

Are small businesses indeed taxed as individuals? My lawyer friend Kale offered some great insights on this. The important distinction is that when a company is taxed as a partnership, the earnings pass through as income to the shareholders and are taxed accordingly. The BUSINESS isn't taxed; its shareholders are. That's the misleading part that Romney and Ryan are glossing over. If a business has three equal partners and makes $150,000, those partners are each taxed individually on their share - $50k - and are not bumped up into the higher tax bracket. Under that scenario, raising the marginal tax rate above $100,000 would have zero effect on the small business because the shareholders are each still in a lower tax bracket. When Romney says small businesses are taxed as individuals it confuses the point.

 In other words, a higher marginal tax rate would only affect small business owners who are in that tax bracket as individuals. These are the wealthy people we want to fleece, right? Right. BUT here's the rub: these high-income business owners are exactly the folks with their hands on the employment lever. Cutting into their earnings would undoubtedly have an adverse affect on employment. That is a terribly foolish tradeoff, and with that in mind we still reach the conclusion that raising the marginal tax rate on income would be a big big mistake, despite the fact that Romney/Ryan seem to be confusing the issue.

 While I'm at it, here is a poll of major economists on the issue of capital gains: This is a very important concept that all voters need to think about. The cliffsnotes: higher capital gains rate probably means smaller pie. So that's the probable consequence of "fair share" policies.

 And finally, something to remember about the opaque nature of the Romney tax plan is this: all major legislation will adversely affect some and positively affect others. You can't put out the details during an election. That's just political reality. I really like the basic intellectual orientation of the Romney tax plan. But it would be a major piece of legislation - much like the Affordable Care Act - on which Romney would have to expend a lot of political capital if elected. Whether it would be politically achievable is hard to predict. But we shouldn't be at all surprised that the details haven't been more forthcoming - you simply can't expect that during an election. Obama wasn't talking about the painful parts of his health care plan when he was running for office. I think we need to look at the basic direction Romney wants to move the tax code in - lower, flatter rates, far fewer deductions. I personally think it is crucial that we move the tax code in that direction, and I would be singing Obama's praises today if he had fought for Simpson-Bowles and done just that.